Archive for September, 2009

“The Resurgence of Whole Life”?

Posted by David Barkhausen in General on September 18th, 2009

A 4-page special advertising section in the Wall Street Journal yesterday trumpeted “The Resurgence of Whole Life.” The sub-heading read: “As markets waiver, more people turn to cash value life insurance to diversify their investment portfolios.”

I happen to be a believer in high quality, carefully designed whole life type of policies for the right situations, but this conviction is conditioned on some important qualifications explained below. In any case, the claim of a whole life “resurgence” is a gross exaggeration in light of recent statistics from LIMRA (Life Insurance Marketing and Research Association) documenting a substantial decline in overall life insurance sales this year, and a single digit drop in whole life business.

Because the dip in whole life sales was much less than for some other types of policies, especially variable life that typically involves an underlying investment in equities, the claimed resurgence is based simply on the less dire results for whole life.

Anyway, what about whole life and the place that life insurance agents and companies suggest that it should have in one’s portfolio? In fact, the best products from the best companies designed in the most efficient way and owned for the right reasons can make a lot of sense for many people who can afford them.

You’ll note, however, that this last statement is highly qualified. It depends on several conditions: (1) best products; (2) best companies; (3) designed in the most efficient way (i.e., to reduce or even avoid the drag of typical sales commissions and thereby to increase short and long-term cash values and eventual death benefits); (4) owned for the right reasons (i.e., not solely as in investment); and (5) the ability to pay the premiums. Without conditions 1 through 3, you’ll have a poor, or at best mediocre, investment return of the cash value that whole life promoters tout.

Our firm’s website contains similar and more specific advice on how to make whole life insurance a good investment. Under the conditions I’ve mentioned, it can dramatically outperform similar investments on an after-tax, risk-adjusted basis. But you have to know what you’re doing, and the odds of finding that out from anyone in the business of insurance sales are, at best, very remote.

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Avoiding Costly Life Insurance Policy Terminations

Posted by David Barkhausen in General on September 12th, 2009

The unforeseen financial shock of the last year has forced many individuals to curtail their spending dramatically, including spending on investments. Those hit most severely by the economic downtown who own cash value life insurance have often found they can no longer afford the premiums. In a large percentage of these cases, they feel the need to drop these policies and switch to term insurance if they continue their insurance at all.

The typical commission structure of permanent insurance causes a substantial, and often total, loss when this happens. The commissions are heavily “front-loaded,” leaving little or nothing to show in the investment component (cash surrender value) of the policy in the first year in exchange for the premium paid. Because of this commission structure, even decent cash value policies generally won’t show the surrender value exceeding the premium outlay for ten years or more.

Avoiding or minimizing commissions – an option insurance agents don’t mention – not only enhances the immediate and long-term value of permanent life insurance but guards against the drastic investment consequences of a policy lapse in the early years of a policy.

The possible future need to change course with a policy is a compelling reason to choose one that maximizes the amount of cash building up immediately within a policy. Even those who think they are only interested in a policy’s death benefit may not anticipate the circumstances (e.g., financial hardship, divorce) that will force them to drop or change a policy during their lives. I have seen these things happen to clients often enough to counsel them to think long and hard about the need to build in future flexibility when selecting a policy. Minimizing or avoiding sales commissions quickly boosts the savings value of a policy. Policy holders can then deal with unforeseen circumstances, such as those of this past year, without incurring an additional heavy investment loss when a policy is surrendered or modified.

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Reasons for Decline in Life Insurance Policy Sales

Posted by David Barkhausen in General on September 9th, 2009

A report this week of the steepest decline in life insurance policy sales in almost 70 years prompts speculation of the reasons for it and what can be done to combat this trend. It also leads to questions about the related phenomenon of policy “lapses” – the termination of policies by surrendering them or, for term insurance or other policies with little cash value, by failing to pay premiums. Let’s at least take a look here at the question of the policy sales decline and perhaps the matter of policy lapses in a subsequent commentary.

The sale of a life insurance policy is complicated by multiple factors – the need, in most cases, to contemplate the possibility of premature death; confusing choices and bewildering insurance jargon; and suspicions that a proposed policy purchase will do more to benefit the agent than the insured.

An effective way to overcome some of the natural resistance to the purchase of needed insurance coverage would be to require disclosure of policy alternatives and costs, including the cost of sales commissions. Commission disclosure is required in the sale of securities products but not insurance policies? Does that make sense? Should companies and agents be able to “hide the ball” by failing to disclose the ability to design policies in a way that reduces commissions and increases cash values and long-term death benefits? Is it fair to let this “secret” out to some consumers and not others? Or does it violate the principle of mutuality – the idea that all similarly situated consumers and policyholders should be treated alike?

These are questions that insurance regulators and company representatives have thus far failed to answer. Consumer advocates and the financial press need to maintain the pressure that will force them to do so.

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